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December 10, 2017

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Week Thoughts: Second Half Strength

MLPs opened with 3 straight negative days again this week.  By Wednesday, the MLP Index had dropped 2.6% from last Friday.  MLPs rallied 2% combined Thursday and Friday to finish down 0.8% overall, but with some positive vibes into the weekend, especially with actual snowflakes falling in Houston Friday (from what I understand).

Oil prices seemed to drive price action more than we’ve seen in recent weeks. MLPs were in-line with utilities and underperformed broader equities.  Natural gas prices were hammered Thursday on a surprise inventory build.  Ethane was dragged down with gas prices, while propane prices held up.  Propane has become a global market and appears significantly tighter than the more regional markets for residue gas and ethane.
There was a big MLP conference in New York, a few refinery analyst days where subsidiary MLPs got some attention, and initial 2018 guidance from KMI and WES.  Expect news flow to lighten up considerably starting next week.  The ENB analyst day and implications for SEP, EEP/EEQ, DCP and maybe PSXP should be the last scheduled news event of 2017.
Unit Count: This Time is Different (excluding dilutive IDR take outs)
One big hope for 2018 is new demand for MLP units shows up when the calendar turns.  Part of attracting fresh interest in the sector is an expectation that new demand for MLP units won’t be offset by a wave of newly-issued MLP units, so talking down issuance and unit creation is important these days.  MLP unit supply can be constrained by a lack of equity issuance or by MLPs eliminating units via buybacks and via mergers.
Less Equity
MLP management teams recognize the market’s current disdain for equity needs of any kind, and have tried to position to be able to commit to no equity issuance in 2018.  The majority of MLP and midstream companies by sector market cap (64% by my count) have said they will not issue common equity in 2018.
Relying on MLPs to be their own governors of capital markets activity hasn’t always played out well (akin to leaving your kid “home alone” with access to ice cream.

MLP management teams could change their minds and issue equity to fund a new project or acquisition that comes along.  They also might decide to issue equity if their stock price has traded up to a point where equity issuance is attractive.
But this time could be different as re-building management team credibility is a priority, cash flow per unit is a focus, and institutional investors are demanding more transparency and accountability from management teams.
Universe Contraction
The other way to restrict supply of MLP paper is by reducing the number of securities out there via consolidation.  Folks lament the lack of consolidation in the sector, but 8 midstream MLPs were consolidated in 2017.  Many of those involved intra-company transactions (WNRL, OKS, SXL, VTTI, PTXP, MEP), but there are fewer MLPs today than there were at this time last year, a positive trend.
I expect accelerating consolidation in 2018, for a several reasons:

  • Would help MLPs regain bargaining power and support project returns
  • More achievable with each successive IDR elimination, reducing the number of parties to satisfy in a deal
  • Can help replace flagging development opportunities
  • Can improve scale and integration, creating a more formidable MLP in a competitive world

On the other hand, consolidation can be painful and disruptive (see MWE, WMB, etc.), and is a risk for potential acquirers that trade at premium multiples.  Other impediments are entrenched management teams intent on building their own empires rather than merge.
To summarize, demand for MLP units remains challenged, but 2018 could represent a slowdown in the expansion of MLP paper that offers some technical support as the calendar turns and as fundamental tailwinds continue.
Winners & Losers
With the exception of CEQP, the top 5 had no news this week, but stocks tend to move around major energy conferences where MLPs get to tell their respective stories.  There was some discussion at the conference of potential DJ Basin oil pipeline conversions into NGL service that could benefit the likes of NGL Energy with oil pipeline capacity.  No news among the bottom 5 either.

HESM gave back some of its gains from last week.  On the YTD leaderboard, NS was replaced on the bottom 5 by CELP.

General Partners and Midstream Corporations
SEMG led midstream corporations and general partners for a second straight week, and KMI reacted positively Friday to news of the ruling in Canada on the Trans Mountain Pipeline discussed below. NSH extended its loss leadership within this group, perhaps on the change in tone from management on evaluating its distribution strategy, and a more likely cut for NS means less cash flow for NSH distributions.

SEMG and AMGP each climbed a spot on the bottom 5 YTD performers.  OKE climbed a couple of spots on the top 5 list, but there are still just two of the group positive for the year so far.

Canadian Midstream Corporations
Not as much volatility among Canadian players this week.  KML was volatile, trading up sharply Friday after a positive ruling related to the Trans Mountain Express pipeline, but had traded off earlier in the week as KMI talked down that very same project in its guidance release.

On the Canada YTD leaderboard, ENB climbed 2 spots from the cellar.

News of the (MLP) World
No preferred or common MLP equity offerings this week.  It would be a surprise to see another equity offering attempted this year, and a major surprise to see an IPO launch.  There were some debt deals, and a couple of shelf registrations filed this week, gearing up for next year.  Also, the Canadian capital markets continue to function well; ENB raised $400mm in a preferred offering.
Capital Markets

  • Tellurian Inc. (TELL), the LNG export terminal development company, priced 10.0mm shares at $10/share, raising $100mm in gross proceeds (press release)
    • Offering was upsized from 8mm shares originally
    • Overnight offering, priced at 16.7% discount to prior closing price, and traded 1.5% from pricing in the following session
  • Emerge Energy Services (EMES) filed form S-3 to register up to $100mm worth of primary units and registered 9.8mm units held by existing holders (filing)
    • The bulk of the existing units were issued in a private placement in May 2013 and related to warrants issued in a private placement in August 2016
  • Enbridge (ENB-CA) priced offering of 16mm preferred shares at $25/share, raising $400mm in gross proceeds (press release)
    • The shares will be entitled to $1.225/share in fixed dividends (4.9% yield) through 2023, when the dividend rate floats based on 5-year Canadian bond yield +3.17%
  • Genesis Energy (GEL) priced public offering of $450mm of senior notes of 6.250% due 2026 at par (filing)
  • Tallgrass (TEP) priced offering of an additional $250mm of 5.50% senior notes due 2028 at 101.5% of par, plus accrued interest from September 15, 2017 (press release)
  • Buckeye (BPL) filed form S-3 to register up to $1bn of L.P. and other units for sale (filing)

Growth Projects / M&A

  • Enterprise Products (EPD) announced plans to convert an existing NGL pipeline into an oil pipeline to transport oil from the Permian Basin to the Texas Gulf coast (press release)
    • EPD would have total crude oil pipeline capacity of over 650,000 bpd after the conversion which is expected to be completed in H1 2020
    • EPD has three existing NGL pipelines that transport NGLs from Permian to Gulf Coast (Seminole Blue, Seminole Red, and Chaparral) and will choose one of those to convert
    • EPD is developing a fourth NGL pipeline, the Shin Oak Pipeline, that will be in-service by 2Q 2019
  • Crestwood Equity (CEQP) announced FID on Phase 2 expansion of Bear Den processing complex that will add an additional 120 mmcf/d of processing capacity (press release)
    • CEQP also announced commissioning of Phase 1 of Bear Den (30 mmcf/d capacity)
    • Phase 2 is expected to cost $185mm with in-service expected by 2Q 2019

Other

  • Kinder Morgan Canada (KML-CA) wins appeal related to Trans Mountain pipeline construction challenges (Reuters)
    • Canada’s National Energy Board (NEB) ruled that KML could proceed with construction work without complying with certain bylaws from the city of Burnaby in British Columbia
    • While the project still faces local and provincial regulatory opposition, this news provides some visibility into the process for addressing opposition
  • Alerian announced results of quarterly review and rebalance, including the following changes effective 12/15/17 (press release)
    • Alerian MLP Index (AMZ): Viper Energy Partners (VNOM) to be added
    • Alerian MLP Infrastructure Index (AMZI): NGL Energy Partners (NGL) to be added
    • Alerian Energy Infrastructure Index (AMEI): Antero Midstream GP (AMGP) to be added, Antero Midstream (AM) and Archrock Inc (AROC) will be removed
  • Tallgrass Energy (TEP) CEO, David Dehaemers, purchased 11,350 shares for $490k, a week after purchasing $2.2mm worth of shares (filing)
  • John Fox, co-founder, former CEO of MarkWest and owner of 1.5mm MPLX common units, issued an open letter to MPC’s board outlining how valuation of the proposed IDR elimination is key to generating long-term MPC and MPLX value for holders (letter)
    • Fox argues IDR elimination plan must be done at a reasonable price of 12-14x and that current valuation estimates of 15-20x would vastly diminish growth prospects at MPLX
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